Subject: [ISG:24010] All U Want 2 Know About Technical Analysis

Glossary

52 Week high

52 Week high is the highest price of a stock/security within the last 1 year.

52 Week low

52 Week low is the lowest price of a stock/security within the last 1 year.

Accumulation Distribution(AD)A momentum indicator that associates changes in price and volume. It is based on the premise that a price move is more significant with larger volume. When there are more buyers than sellers on a particular stock then it is under accumulation, but when there are more sellers then buyers the stock is under distribution.

ADXDI & ADX are used for identifying when a definable trend is present in a security/stock. That is, the DMI tells whether an stock is trending or not. The scale for the DMI is from 0-100. The Average Directional Movement Index (ADX) is a moving average of the DMI.

Breakdown

If the price of a security moves below the last know support level(price), it moves DOWN very fast as there is NO known support/resistance levels beyond that price. Risk/reward ratio being one of the highest in this scenario for shorts.

Breakout

If the price of a security moves above the last know resistance level(price), it moves UP very fast as there is NO known resistance/support levels beyond that price. Risk/reward ratio being one of the highest in this scenario for longs.

Force IndexForce index combines price movements and volume to measure the strength of bulls and bears in the market. If the Force index is above zero it signals that the bulls are in control. Negative Force index signals that the bears are in control. If the index whipsaws around zero it signals that neither side has control and no strong trend exists. The higher the positive reading on the Force index, the stronger is the bulls' power. Deep negative values signal that the bears are very strong.

Long

Buying a stock/security expecting the price of stock to move up.

MACD

The "MACD" is a trend following momentum indicator that shows the relationship between two moving averages of prices. To Calculate the MACD subtract the 26-day EMA from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on top of the MACD.

There are 3 common methods to interpret the MACD: Crossovers - When the MACD falls below the signal line it is a signal to sell. Vice versa when the MACD rises above the signal line. Divergence - When the security diverges from the MACD it signals the end of the current trend. Overbought/Oversold - When the MACD rises dramatically (shorter moving average pulling away from longer term moving average) it is a signal the security is overbought and will soon return to normal levels.

MFI

The Money Flow Index measures the strength of money flowing into and out of a stock. The difference between the RSI and Money Flow is that where RSI only looks at prices, the Money Flow Index also takes volume into account.

Resistance

Resistance price is the price where sellers flock in to sell and generally do NOT let the price go above the resistance level.

RSI

When talking about the strength of a stock there are a few different interpretations, one of which is the Relative Strength Index (RSI). The RSI is a comparison between the days that a stock finishes up against the days it finishes down. This indicator is a big tool in momentum trading.

Short

Borrowing a stock/security expecting the price of the stock to move down.

Stochastic Oscillator

A technical indicator that compares where a security's price closed relative to its price range over a given time period. The theory behind this indicator is that, in an upwardly trending market, prices tend to close near their high. Whereas, during a downward trending market, prices tend to close near their low

Strength

Strength of a security is defined as the number of times a security/stock visited a particular price and the amount of accumulation(shares bought) or distribution(shares sold) took place. The more the number of times a stock visits a price, the more stronger is the support/resistance level. Bear in mind, a support line/price becomes a resistance line/price, if the stock moves below it, and vice-versa.

Strength(number) calculations for support/resistance on our website has the following meaning.

Strength 3 = Very strong support/resistance level. Chances are that if it is broken, the stock would move pretty fast in the respective direction. Since this is the most sought after level by bulls and bears, for support and resistance respectively.

Strength 2.75 = Slightly strong support/resistance level. Chances are that if it is broken, the stock may move fast in the respective direction. This support level/price is not as strong as the one with strength 3.

Strength 2.5 = being strong, Strength 2 being weak and Strength 1 being very weak support/resistance level.

Support

Support price is the price where buyers flock in to buy and generally do NOT let the price go below the support level.

Technical analysis

TA, as it is widely known, is a method of evaluating stocks/securities by analyzing historical data. There are 2 schools of study in the stock/equity market. Fundamental and Technical analysis. Incidentally, BOTH use historical data, though different ones, to assess the performance of a stock/security and possibly predict the future trend based on past performance. TA has become the most popular tool for selecting and evaluating securities using various indicators that show a pattern to predict future performance. Most important thing to bear in mind when using various technical indicators is that NEVER EVER place a trade looking at ONLY one indicator. Most, if not all of the indicators should give appropriate confirmations of a price trend for a given security/stock for it to move in the direction meant, up for longs and down for shorts.

Williams %R

A technical analysis momentum indicator that measures overbought and oversold levels.It is used to determine market entry and exit points. A Williams reading over 80% usually indicates a stock is oversold, while readings below 20% suggests a stock is overbought.

Bullish 3 white soldiers

This CandleStick represents strong buying pattern. This is NOT a Shorting candidate and hence shorts must stay away from these stocks. Longs must maintain patience, as there may be a few resting days before any move upwards.

Bullish Harami

A long black day with average volume in the existing downtrend. The next day trades in a small range within the previous day's real body. Light volume on the 2nd day should give rise to concern by the bears. Look for higher prices over the coming days, especially if the next day provides confirmation of a trend change by closing higher.

Belt hold Bullish A significant Open Down triggers huge buying. Hence the open was incidentally the low for the day. Stock trades above the open the whole day. Short covering takes place during this time.

Bullish Hammer The price goes much lower after the open and then closes near the opening price. This fact reduces the confidence of the bears. Ideally, a white real body Hammer with a higher open the following day could be a bullish signal for the days ahead.

Bullish Matching Low Two days with equal closes is a clear indication to the shorts that an important support level may have been found. Higher prices may be ahead in the days to come. A higher close the next day would serve as confirmation of the reversal.

Bullish Piercing Line 1st day the Stock has a real black body. Meaning, the stock's trading range was larger than normal and it ended the day in a definite RED. 2nd or the following day, the price closes just above the midpoint of the previous day's trading range. This gives an indication of forming a bottom.

Bullish Engulfing Price of a stock opens below the previous day's low, but closes above the previous day's Open. This gives an indication of a potential bullish reversal and that bears are probably running out of steam.

Bullish Harami Cross A big down day followed by a doji. Doji, meaning, the open and close was almost nearly the same. In this particular case, today's trading range is very much within the previous day's range. This is an indecisive situation and the stock can go either way. If the next session and following sessions rally upwards, then it is definitely a bullish sign.

Bearish 3 Black Crows Profit takers take control and keep the stock down constantly over the last 3 trading sessions. Though, very short-term the stock may be oversold, it does signal start of a bearish trend, unless it recoveres well.

Bearish Harami In an uptrend, a long white candle is followed by a short day that is engulfed by the 1st day's body. Meaning, the 1st day is a very good strong up day. The following day the stock trades in a very small trading range. Lower volume on 2nd day questions the bullishness even more. Bearish reversal may be on cards.

Belt hold Bearish In an uptrend, a long black day causes this candlestick reversal pattern to occur. The open is the high for the day and the stock trades below the open/high all day. Suggesting that bulls are unable to take the stock even further. Bearish reversal.

Bearish Hanging man In an uptrend, the close is very near the opening price for the day suggesting a Bearish hanging man. Though the low for the day is much lower than the open. This signals that there are many more sellers around waiting to sell. If the next session opens or closes lower, then it would definitely be a bearish signal.

Bearish Engulfing In an Uptrend, the 2nd/current day's body engulfs previous day's body. 2nd/Current day stock opens above the close of 1st day, but is unable to hold and sells of Closing below the open of the previous day. Suggesting that the bears might be in control.

Bearish Harami Cross A big Up day followed by a doji. Doji, meaning, the open and close was almost nearly the same. In this particular case, today's trading range is very much within the previous day's range. This is an indecisive situation and the stock can go either way. If the next session and following sessions rally downwards, then it is definitely a bearish sign.

Bearish Dark Cloud Cover A good strong up day followed by the 2nd day. 2nd Day, the price opens up but again quickly sells of and close below the mid-point of previous day's trading range. Suggesting bears might be in control.

Strong Sell We believe that the upside potential is limited and hence it is a risky proposition to hold this stock any longer. This doesn't mean, the stock cannot move up anymore. Just that the profit potential is minimum when compared to the loss potential. Must be sold at the first good opportunity, or otherwise.

Sell Based on various technical indicators and past performance, we believe that a stock that has a Sell recommendation by us is very weak. If you wish to enter into a position, Enter only after it recovers from it's weak position.

Hold This recommendation means that it is a stock that may go either way(up or down), but Technically it either looks good or seems to be improving. If neither is true, then it is a stock that is trading very close to it's support and resistances and we believe it is not as risky. Place a stop/loss around the lower support.

Buy Stocks in this category are good technically. They have a good profit potential in the short term.

Strong Buy This is a Must have stock, and investors/traders should get into this as soon as they can. Looking at the past performance, stocks under this category have relatively high profit potential, with limited or no risk.

No Recommendation At this point in time, technicals are neither pointing at a Sell nor at a Buy. Nor are they in a clear hold position. Hence, these stocks must be traded by looking at other factors, such as the support/resistance levels and moving averages. It is very much possible that the situation changes within a day or two, and it either gets into a Sold or buy category.

Technical References/Help

Res/Supp Support/Resistance Levels Support: Support price is the price where buyers flock in to buy and generally do NOT let the price go below the support level. Resistance price is the price where sellers flock in to sell and generally do NOT let the price go above the resistance level. Always Buy at Support and Sell at Resistance.

Str Strength of a security is defined as the number of times a security/stock visited a particular price and the amount of accumulation(shares bought) or distribution(shares sold) took place. The more the number of times a stock visits a price, the more stronger is the support/resistance level. Bear in mind, a support line/price becomes a resistance line/price, if the stock moves below it, and vice-versa. Strength 3 means, it is the Strongest support/resistance level and Strength 1 means it is a very weak Support/Resistance level.

Strength Meter Strength Meter : Strength Meter shows How strong a Stock is from Technical analysis perspective. It is more than just the sum of all the technical indicators that we use here, and involves lot of complicated calculations to come up with a conclusive Bullish or Bearish result.

Bull/Bear Bullish( ): If the stock and it's Technical indicators is Strong and has upside potential or is already trending up.Bearish( ): If the stock and it's Technical indicators is Weak and has very limited upside potential when compared to its downside potential.

Overall Strength Overall Strength of the Security. This indicator gives the overall outlook of how strong or weak a stock is. If it shows Bullish, it would mean, the stock is good from long side. If the stock shows Bearish, it would generally mean, a good stock to short.

Candlestick Candlestick is a very old Japanese Technique to depict patterns and predict future prices. Candlestick formations could be bullish or bearish in nature.

SMA

SMA stands for Simple Moving average. As the name suggests, it is an average of all the elements. For example, SMA of 2, 4, 6, 8 would be 5((2+4+6+8)/4). Moving averages act as a very strong support/resistance levels if a stock is trading above/below the moving averages. Most common moving averages are 10,20,50 and 200 day Moving average.

EMA

EMA stands for Exponential Moving average. EMA is the smoothened version of an SMA and is more reliable than SMA. Calculation of EMA is much more complicated when compared and uses SMA as it's basis. Moving averages act as a very strong support/resistance levels if a stock is trading above/below the moving averages. Most common moving averages are 10,20,50 and 200 day Moving average.

Fibonacci Series

Fibonacci Numbers/Series is used to predict the price movement of a stock. This is one of the many tools available for Stock Price analysis. Fibonacci numbers are used for Wave theory(Elliot Wave) as well.

There are 3 columns above for Fibonacci series.

Breakout : When a stock breaks out from the last known resistance level, how to figure out where would it hit the block. These numbers would give you a relatively correct figures about the most probable prices where it will hit major resistance. Breakdown : When a stock breaks down from the last known support level, how to figure out where would it hit the block. These numbers would give you a relatively correct figures about the most probable prices where it will find major support. Key levels : These are the retracement levels calculated out of the last 6 months of information. The 66%, 38.2% and all other key levels can be found here.

The Most important "retracement levels" in Fibonacci series, 38.2%, 50% and 61.8% are show in RED, GREEN and BROWN respectively.

Inta day Support Resistance

Support price is the price where buyers flock in to buy and generally do NOT let the price go below the support level.

Resistance price is the price where sellers flock in to sell and generally do NOT let the price go above the resistance level. Intraday means, during the course of a Trading Day. R1 = First Resistance for the specific Day. R2 = Second Resistance for the specific Day. S1 = First Support for the specific Day. S2 = Second Support for the specific Day.

In general, if the price of a Security crosses R2 or S2 and reverses direction, it is a very Bearish/Bullish sign respectively. Conversely, if the price crosses S1 or R1 and stays above/below this price, then it is considered very Bullish/Bearish Respectively.

About Support & Resistance

Support price is a price where Buyers come in huge numbers to protect the price of the stock and generally do NOT let the stock close below this price. Conversely, a Resistance Price is the one where Sellers come in big numbers and do Not let the stock close above this resistance price.

Support and Resistance levels are not made/established overnight. It is a pattern that is formed over a period of time. Generally 6 months is the ideal time-frame, which is what we also use on our site. Both Support and resistance have strengths associated with it. And this strength depends on how many times a stock visited a particular price and how much accumulation happen at that price. The more number of times a stock visits a particular price, the stronger the action. Either Resistance or Support. Let us take an example of Maruti Udyog from the Indian stock Market. Note, that the same is applicable to any stock anywhere in the world.

Take a look at the Chart below. From September 04, until late November 04, it has been testing Rs.394 price range a few times. And it decisively broke out on more than daily average volume around November ending. Once it broke out, there was no resistance above it. Until in early January, where the steam went off and it could not hold the Rs.460+ level and turned south.

Most traders would jump into the ship and buy when it starts going down. And many keep averaging down until they are completely out of money, unfortunately. Instead a novel approach would be to wait for the price to drop to the last strongest support level which is and still has been(until the time this Chart was drawn) Rs.394 as reported by our very own support/resistance calculator. Guess what, Maruti again touched this price and started it's upward journey, again to face resistance at Rs.461 which is a relatively strong resistance level. Though it tried to break the 460+ barrier a few times, touching as high as 500+, it couldn't hold on and turned south all the time. Now if you look carefully at the chart, every time it turned south, it found support just around 400. Why, because, this is a very strong support level and buyers do NOT let the price of this stock close below 400+. Also every time it tries to go near 460, a huge resistance comes in the form of sellers and it turns south.

So to sum up, if a trader had waited enough to buy at the strongest support, he/she would have made good money(around 15%+ profit) within a very short time span( less than 12 trading sessions). Please note, this is NOT a hypothetical example, and it works with almost all the stocks.

Always buy at Support and Sell at Resistance, at least for the short-term.

About Fibonacci Retracements

A little history, before we go deep into this topic.

Leonardo of Pisa, nicknamed, Fibonacci was one of the best known mathematicians of his time. His greatest find was Fibonacci series.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, ...

This sequence is constructed by choosing the first two numbers (the "seeds" of the sequence) then assigning the rest by the rule that each number be the sum of the two preceding numbers. This simple rule generates a sequence of numbers having many surprising properties, of which we list but a few.

Take any three adjacent numbers in the sequence, square the middle number, multiply the first and third numbers. The difference between these two results is always 1.

Take any four adjacent numbers in the sequence. Multiply the outside ones. Multiply the inside ones. The first product will be either one more or one less than the second.

The sum of any ten adjacent numbers equals 11 times the seventh one of the ten. Mesoamericans thought the numbers 7 and 11 were special.

What can we get out of these numbers. Try picking any number and divide it by the next number in the series and see what you get.

For example: 21/34 = 0.6176 or 34/55 = 0.6182 or 144/233 = 0.6180

Or the 62% retracement level. Similarly, if you take the previous number and divide it by the next number you get another important retracement level 38%.

For example: 21/55 = 0.382 or 34/89 = 0.382

And you can go on like this. But the most important retracement levels are 38% and 62%. On our site we have Fibonacci numbers calculated for every stock, but it is more than just these two %ages. And includes other key levels such as 50% and others.

Let us take Toll, Toll Brothers, a very HOT stock these days from the Real estate Industry. Let us dissect the chart.

We consider the Low in January, around $32 and a high of $45(approx) around early March. The Difference here is $13. Let us do the calculations using the above numbers.

38% retracement level would be, $13*0.38 = $5(approx).

50% retracement level would be, $13*0.5 = $6.5.

62% retracement level would be, $13*0.62 = $8(approx).

Now let us use these retracement levels to see how the stock behaved after 1st March.

When it was going down, it stopped nearly around $37-$38 mark, which is about 62% retracement level. Note, how the stock held this level and recovered nicely after this.

On its course to recovery, it faced slight resistance around the 50% retracement level, around $40($45-$5).

Once it blew past this level, the next level was the 0% or the last known upper resistance price. In this case, $45.

Now, this is a very good example of 62% level, once again. See how the stock stopped its upward run just around $53. Guess what. $53 is nothing but the 62% retracement level(on the upside). $45+$8.

Finally, the stock faced resistance at the 100% level. $45+$13 = $58. And it held support at the 62% retracement level.

62% retracement level would be, $13*0.62 = $8(approx).

So to conclude, Fibonacci numbers are a real find that if used properly can guide you to better targets. These numbers prove really helpful to judge the upside and downside targets.

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